Selecting applicable technologies for the direct low-cost insurance industry M S A I

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I

NDUTECH

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OBILE COMMERCE IN

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OUTH

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FRICA

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The author is responsible for the content of this thesis; the copyright belongs to the author

Company name: Indutech (Pty) Ltd

Location: Stellenbosch, South Africa

1st Supervisor: Dr. L. Louw

2nd_Supervisor: _{Mr. B. Katz}

Final publication thesis: November 18, 2008

Author: A.B. Kampman

Student number: 1272411

Study: MSc BA Business & ICT

Faculty: Economics and Business

University: University of Groningen

Supervisor: Dr. K.R.E. Huizingh

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Preface

By going to South Africa in the beginning of February 2008, I entered a whole new world. Not only the country made an enormous impression, but also the world of direct low-cost insurance was something completely new to me. Thanks to the many weekends with others that I spend travelling around, I was able to get a good idea of the possibilities and changes happening in South Africa. By working at Indutech and setting up a newspaper at a local township, I really got the opportunity to see the country from a different perspective than most tourists will probably see it. This unique opportunity and experience is something that I will keep close to me for the rest of my life.

This final thesis is the result of almost five months of internship at Indutech, and could not be achieved with the help and support of many people, for which I would like to thank them all. Nevertheless, I would like to thank a few people in particular.

First of all, I would like to thank everyone at Indutech for their hospitality, openness and kindness during my time in South Africa. I spend great times with you during the lunches and ‘braais’ we had together, and you all taught me a lot about the country and its language. Also the dinners with a few colleagues at their homes, were unforgettable. Special thanks goes out to Louis Louw and Bernard Katz, who always found some time to debate on the special subject of low-cost insurance and the use of technologies. Their knowledge and vision really supported me during the whole process. Also Professor Niek du Preez, Marc-Allen Johnson and Heinz Essmann had a special role during my internship.

Second of all, I would like to give a special thanks to my supervisor Dr. K.R.E. Huizingh of the University of Groningen. With his wide experience in the field of e-Commerce, his very constructive comments and his openness towards new ideas, he supported me in the construction of a thorough research and solid thesis. I also would like to thank Professor Dr. A. Boonstra for his time as an examiner in the final part of writing this thesis. His experience in the field of Business & ICT and enthusiasm on the subject was very helpful and supportive.

Finally, I would like to thank my family and friends for their continuous support. Particularly my mother, who in the beginning of 2008 was not really looking forward to my trip to South Africa, but was even at 9000 kilometres always there to support me. Also my friends in Groningen need to be thanked for reading my thesis and their constructive comments.

Without all these people, this thesis would not be what it is right now!

Groningen, November 2008 Arjan Kampman

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Management summary

South Africa faces many changes in various parts of the economy. Even though many changes are inevitable and sometimes have devastating effects, some changes can be turned into an opportunity.

Organisations operating in the South African insurance industry face a new type of insurance concept: low-cost insurance products. A concept that is developed based on increasing regulations, limited residents registration, and the possibility to have direct access to a new market with the use of technology. For Indutech, specialised in innovation management, this meant a new way of supporting clients in selling low-cost insurance products with the use of mobile commerce technology.

Motivation for research

In an upcoming market where customers have to be identified and the technology is unexplored, structure is required. This structure can be given by a decision support framework, which supports the selection of applicable technology for direct low-cost insurance products. Indutech wants to research the possibilities in the area of low-cost insurance products and is doing that by focusing on the use of m-commerce technology that enables these products.

This thesis, with the accompanying research, aims to deal with the possibilities described above. This has been done according to the following research objective: “To develop a decision support framework that supports Indutech in the selection of mobile commerce technologies during product development for direct low-cost insurance products.”

Direct low-cost insurance

The concept of direct low-cost insurance is a way of selling insurance without the use of brokers or any other type of intermediary. It is difficult to compare it with other types of insurance, because the products have rather unique specifications within the market itself, regarding technology and market specifications. Low-cost insurance products can be characterised as: easy accessible, fast to claim, mobile, cheap, and easy to use. The market of low-cost insurance products has the following characteristics: a unique structure, low-income, largely unbanked, financially inexperienced customers, and many upcoming players.

Mobile commerce technology

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Decision support framework

To enable Indutech in the selection of m-commerce technologies for direct low-cost insurance products, a framework is needed. This framework combines the customer requirements with the available and emerging m-commerce technologies, and results in a clear and univocal overview. This overview supports Indutech in the selection of m-commerce technologies and a step-by-step plan enables the use of the framework in new situations with other markets or other technologies.

Results

The research described in this thesis, shows that even though the direct low-cost insurance concept is very broad and specialised, various elements of other low-cost products and regular insurance products can be found. The wide selection of available and emerging m-commerce technologies is structured with a decision support framework, which supports Indutech in the selection of these technologies during product development for direct low-cost insurance products. The main elements of this framework are: customer requirements, a weight to each of the

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Introduction

The organisation of Indutech in Stellenbosch, located in the heart of the South African wine lands, is a business engineering company which supports clients in enterprise wide innovation management. The company was established in 1993 to commercialise innovation management research at the University of Stellenbosch and still keeps close relations with the university. The organisation believes in the philosophy that openness and a critical view are needed for successful innovation projects. To sustain this philosophy and not to become a large player with pre-developed packages, continuous development of their business activities is needed. Indutech currently employs 23 people, operates in the life insurance industry for five years, and is since the end of 2006 partner in the set-up of a new business unit at a large insurance company. Indutech uses its expertise in the insurance industry to develop ideas into workable product concepts, and to give structure to the whole information generation. IT plays an important role in this respect.

This new business unit, Cover2Go, is created to implement a new type of insurance; selling insurance to the low-income market, without the use of a traditional broker, and based on mobile commerce technology. The use of traditional distribution channels was often too expensive to offer low-cost insurance, because people could only be reached by traditional brokers. With the use of mobile commerce technology, this has changed.

Because many people in South Africa often do not have a permanent address or a bank account, but do possess a cell phone, these phones have a strong, central position in the daily life of many people. One of the clients of Indutech therefore created the concept to sell low-cost insurance products directly to the customer, without intervention of a broker or other intermediary, to save costs and keep the price of the insurance product as low as possible. This type of insurance can be bought instantly, for a small amount of money, often covers natural causes of death, and is based on a short-term basis. Indutech was involved from the very first beginning of this project.

During the development and implementation of these direct low-cost insurance products, several problems have to be faced. One of these problems is the knowledge on customer

requirements. Because a great part of the new market is unknown to the organisation, their needs and wants are difficult to identify.

Another problem for the development of direct low-cost insurance products is the selection of applicable mobile commerce technologies. With a great variety of available technologies, selection by an organisation is difficult and a time-consuming task.

The research in this thesis will therefore focus on the available and emerging mobile commerce technologies that directly relate to the use of direct low-cost insurance products. For the functioning of these insurance products, one can think of different areas of technology like wireless

communication technologies, devices, and user interfaces.

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1. Research description

This chapter will describe the research performed by the author. The motivation for research and problem definition will be elaborated first, after which the step-by-step model and sub questions will be described. Data collection and deliverables will be focused on, after which the research structure will highlight the content of the different chapters and related sub questions.

Figure 1.1 Research description

1.1 Motivation for research

The motivation for research is based on two reasons. First of all, selling direct low-cost insurance products is a rising business in South Africa, in which many possibilities for further development are available. This makes it an interesting area for Indutech to do research in.

Secondly, Indutech is experiencing problems with selecting suitable mobile commerce

technologies during product development, and is looking for possibilities to structure and improve this. The results of the research will be used for an overall picture of the available technologies and for a critical view on the role of technology in direct low-cost insurance products.

1.2 Problem definition

A formulation of a problem contains a research objective and from this a logically derived research question, which together determine the ‘what’ and ‘why’ of a research. The ‘why’ focuses on the reason for a research and is specified in the main research objective. The ‘what’ focuses on the information that is needed to answer the main research objective and is specified in the main research question (Verschuren, 1992).

1.2.1 Main research objective

The research objective that will be used as guidance in this research is:

1.2.2 Main research question

In addition to the main research objective, the main research question will be:

Main research question: What are the available and emerging mobile commerce technologies that are directly related to the use of direct low-cost insurance products and what are the elements of a final decision support framework?

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1.2.3 Scope

To maintain the feasibility of this research, it is necessary to determine the right scope. This ensures that the final product meets the objective set in the beginning of the research.

This research will only focus on direct low-cost products in the insurance industry, instead of all types of insurance products. The choice for this scope has been made, because it is not possible to draw a generic conclusion for the wide variety of products and players operating in the market. The focus for this category is in line with the standard income categories of the insurance industry, which will be described in Chapter 2.

Next to the focus of industry, also the technological side will be taken into account. Because technology can be used in various ways and related to direct low-cost insurance products, the focus will be on mobile technology that is directly related to the use of a low-cost insurance product.

For the scope of the research, the following limitations apply to this research:

 The time of the actual research at Indutech (Pty) Ltd, Stellenbosch, will have a maximum of four months starting on the 11th of February 2008 and ending on the 11th of June 2008.  Access to the (online) research facilities of both universities is available.

 The final thesis should meet the academic standards set by the University of Groningen.  The results of the research need to be useful for Indutech and have to be in line with the

main research objective.

 A case study at an insurance company will be used to gather information for this research.

1.3 Step-by-step model and sub questions

The step-by-step model is a schematic reproduction of the objective of the research and shows the steps that need to be taken in order to accomplish this objective. The sub questions are

formulated by means of this model and need to fit within the different elements.

1.3.1 Step-by-step model

The following model shows the approach of the research and is a way to structure the related results in an organised pattern. The model used in this research shows the input for the complete research as well as the input for particular research areas.

Figure 1.2 Step-by-step model

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1.3.2 Sub questions

In addition to the step-by-step model, the main research question can be split into different sub questions summarised below, giving additional details of the research. Each sub question will be elaborated in the different chapters of this thesis.

1) What is direct low-cost insurance?

a) What are the characteristics of direct low-cost insurance products? b) What are the market characteristics of direct low-cost insurance products? 2) What are the applicable m-commerce technologies for the direct low-cost insurance

market?

a) What are the required m-commerce technologies that are directly related to the use of direct low-cost insurance products?

b) What are the available m-commerce technologies (technology landscape)? c) What are the emerging m-commerce technologies (technology roadmap)? 3) What should a decision support framework for direct low-cost insurance look like?

a) What are the requirements of the framework? b) What are the different elements in the framework? c) What is the applicability of the framework in future use?

1.3.3 Data collection

The collection of data is based on two parts; a theoretical and an empirical part.

The theoretical part is first of all based on literature, which will be used to gather information about the maturity of m-commerce activities in the insurance industry. Both the library and electronic articles of the University of Stellenbosch and the University of Groningen will be an important input. Secondly, information about the insurance industry is necessary to identify the basics of the industry. Finally, literature on the selection of technology will be used, to develop a decision support framework that enables the selection of m-commerce technologies.

The practical part of the research is based on information, models, interviews, and documents provided by Indutech. A case study will be used as an important practical input, with the purpose to gather information about direct low-cost insurance products. A case study at Cover2Go is expected to deliver an important input, compared to the other types of data collection methods, since the information is situated in a real life context and can be analysed in a qualitative manner (Dul & Hak; 2007).

1.3.4 Deliverables

The research in this thesis will result in the following deliverables:

 An overview of the available and emerging mobile commerce technologies; a technology landscape and a technology roadmap (sub question 1 & 2).

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1.3.5 Definitions

A brief overview of various concepts that are used in this research will be defined before these can be applied.

 Direct low-cost insurance: Specialised type of insurance offered for a low price, particularly focusing on short-term cover for a specific situation, and without the intervention of a broker or other type of intermediary.

 Mobile commerce technologies: The set of technologies that enable and/or support m-commerce products to operate in its environment.

 Case study Cover2Go: A study of a new business unit which is developed to offer direct low-cost products and which will be used to gather information on the usability, experiences and expectations of this product in this specific market.

 Decision support framework: A tool that gives an overview of the elements required in the selection of m-commerce technology for direct low-cost insurance products, and which enables an organisation to determine the applicability of this technology in a product concept.

1.4 Research structure

In this section an overview of the different chapters of the thesis will be given. The structure of a chapter is determined by the way a sub question is elaborated.

In Chapter 2 the basics of the research will be elaborated, by focusing on the product characteristics and the market of direct low-cost insurance. This will result in the answer to sub question 1. Chapter 3 will describe the available and emerging m-commerce technologies that enable the use of direct low-cost insurance products. This chapter will give an answer to sub question 2.

After the applicable m-commerce technologies have been identified and described, the decision support framework will combine all the relevant elements. The answer to sub question 3 will be used to develop this framework.

A graphical overview of the chapter description can be found in Figure 1.3.

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2. Direct low-cost insurance

With the intensifying and widespread use of electronic commerce activities (e-Commerce), customers are able to buy products and services everywhere, at any time, and usually for a good price. The use of electronic systems for the support of commercial activities extends to a variety of possibilities among which support of e-mail, online ordering, and logistic information systems are only a few examples. E-commerce also gained a great deal of popularity in the support of commercial activities in the Business-to-Consumer (B2C) market. In a variety of traditional businesses, like the banking and retail industry, e-commerce radically changed the way business was being done in the 1990s. Next to that, also new business concepts arose that were based on the sale of products and services online, often only with a traditional logistic channel as a sign of ‘visible’ business.

Even though e-commerce is still increasing in popularity, the business field of Mobile Commerce (m-Commerce) is making its entrance in the world of electronic business. Where e-commerce is particularly focusing on wired applications and services, m-commerce goes beyond that border by making use of a variety of wireless technologies that can be used in several business concepts.

One of these business concepts is the access to the lower income markets for the direct sale of insurance products. Because of the lack of well-developed residents registration and poor

distribution channels, but with the use of cell phones, the insurance industry became interested in the possibilities to serve this market. In an upcoming economy like the South-African one, more people can afford to spend money on insurance cover, but many do not have access to the regular ways of acquiring these products and services, both personally as electronically. Through the high density of mobile devices (particularly cell phones) in (non-)rural areas, this market became easier accessible for low-cost products, of which insurance products are part of. Because costs need to be kept to a minimum, insurance products have to be simple, cheap, and easy to request. The fact that brokers are no longer being used and insurance policies are easy to claim (often within 48 hours), contributes to this.

Direct low-cost insurance products are difficult to compare with other types of insurance products. They do not only have a specific market in which they are being sold, but also have rather unique specifications within this market itself, regarding technology and market specifications. To understand the functioning of direct low-cost insurance, the background and the value of this type of insurance will be discussed in this chapter by taking a closer look at the characteristics of low-cost insurance products and the market.

This chapter will have a detailed view on direct low-cost insurance products and the related market, and has been divided into two sections: the product characteristics (§ 2.1) and the market characteristics (§ 2.2). After this, a short section will introduce the concept of m-commerce

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2.1 Product characteristics

Compared to regular insurance products, direct low-cost insurance is based on a different way of selling insurance products. Where the industry used to work with brokers to keep in contact with their customers, collected its largest profit rates from the high premium rated insurance products, and were regulated by an enormous amount of rules and regulations, this relatively new market is different in several ways. Even though various projects have been initiated to access and serve the low-cost market, only a few of these were profitable. Particularly the major insurance companies were not able to quickly serve the customers, and many failed to successfully implement this new business concept.

In the beginning of this century when low-cost insurance was an upcoming business, a small variety of products was launched. Nowadays most of the insurance companies in South Africa offer some kind of low-cost insurance, a few with a stronger business focus than the other. Even though many players and different ideas about the concept of low-cost insurance exist, roughly three product groups can be identified in the portfolio of an insurance company. These are:

 Accidental cover: For financial support in accidents with minibus taxis and cars, or other types of accidents that will result in disability or even death.

 Funeral cover: Instant (< 48 hours) financial support for funeral payments.  Life cover: Overall financial support in the case of permanent disability or death. In all of these different types of insurance, the idea of the product is to be easy accessible and fast to claim in case of an emergency. Easy accessibility can also be found in the fact that there are in most cases no medical tests required to purchase the insurance. A South African passport, a phone call or a text message are often the only things needed.

Because of this easy accessibility and low-cost characteristic, traditional ways of extensive underwriting1 and selling products through traditional channels have been set aside. Underwriting processes are left out of the process or are minimized to a few basic steps and questions to determine the condition and situation of a customer. Brokers and intermediaries that traditionally play an important role in the contact between customer and company are also left out in the purchasing process.

2.1.1 Micro-insurance

Next to the more specific definition of direct low-cost insurance used in this research, a more general and wider used term that is related to low-cost insurance, is micro-insurance.

Micro-insurance products are used in several upcoming and developing economies, like India, Pakistan, Sri Lanka, Uganda and South Africa. Particularly in times when poor people face risks in loss of income or labour, through unexpected and often uncalculated events, the cover of insurance is a mitigating circumstance by which often not only funeral expenses can be paid, but also can provide a cash-flow on the short term to continue life in its normal way.

In the article from Roth et al. (2007), micro-insurance is defined as “the provision of insurance services targeted at or sold to low-income people”. This definition is a rather basic one, but highlights the focus on the low-income group. The Insurance Regulatory and Development Authority (IRDA), defines micro-insurance in the following way: “Insurance with low premiums and low

caps/coverage”, in which ‘micro’ stands for the small financial transaction that each insurance policy generates. The focus in this definition lies more on the low premiums and coverage. The final definition comes from Dror & Jacquier (1999), who define micro-insurance as: “The use of insurance as an economic instrument at the ‘micro’ level of society (i.e. smaller than national schemes)”.

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The different definitions show a variety in interpretation, but overall three elements can be seen: low income, low premium, and low coverage. These elements are the basis for defining general micro-insurance. Even though these premiums are interesting for customers, insurance companies have to deal with low-margins, large quantities, and high-efficiency, to make a profit on the long-term.

2.1.2 Technology

For the current and future sale of direct low-cost insurance products, the technology element is an important part of the overall functioning and success of the product. To understand the

possibilities of technology in low-cost insurance, this section will give a first introduction on the current use.

Technology in traditional insurance products can be reduced to online information search and communication through digital channels with the insurance provider. As described above, almost all low-cost insurance products make use of some kind of technology based communication system; webmail, short text messages, cell phones or GPRS devices. These are all focused on the creation of a communication platform, which is easy to use, and provides security to both the customer and the company. A first impression of several types of relevant technologies and devices that are currently being used in the low-cost insurance industry is given in Figure 2.1.

Communication network Point of sale Interface & customer interaction

Mobility Common used

technology

Accident cover

Cell phone (GSM) Via SMS Text based, long distance interaction High Funeral insurance Telephone (fixed/cell) or direct sale (GPRS) Via outlet or call centre Direct sale or telephony based Medium (limited to number of outlet stores) Life cover Telephone

(fixed/cell) Via call centre Telephony based High

Figure 2.1 Overview of commonly available products with their technologies

As can be seen above, the products all have a variety of different technologies that are used to serve the market. Nevertheless, a common element can be identified: mobility. Mobility makes it possible to purchase insurance everywhere, fast, and instantly. Together with the simplicity of the product, this creates the unique character of a low-cost insurance product.

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2.2 Market characteristics

Besides the characteristics of the product, also the market characteristics will be taken into account. In order to get a better understanding of the insurance market in South Africa, with a special focus on low-cost insurance. Due to the complexity of both the country as a whole and the insurance market in particular, a detailed research of the demographic areas is necessary. Also the income categories will be an important part of focus, with respect to this particular character of low-cost insurance products.

2.2.1 South Africa

Demographics have generally been influenced by several factors, among which apartheid and racial wars are a few. Together with a great variety in population groups, languages and cultures, make the country very complex. For an organisation that needs to scope the market and determine the main target group, dealing with this complexity is a challenging task. A general overview of the demographics of South Africa that are related to this research, with a focus on the insurance industry, will be briefly described.

2.2.1.1 Population and income

The total population of South Africa for October 2008 was estimated to be 48 million people2_.

The majority of this population is living in the KwaZulu-Natal region (21%) and only a small part of the population is living in the Northern Cape region (2%). The total population is generally being divided into four groups: Black (79,5%), Coloured (8,9%), Indian/Asian (2,5%), and White (9,2%). There are eleven official languages that are spread throughout the country, of which IsiZulu, IsiXhosa,

Afrikaans, and English are the major ones. South Africa has an adult population (18-65+) of 31 million people and the average life expectancy is 43 years old3.

The labour market can roughly be divided into three groups; people that are employed (43%), unemployed (13%), and the people that are economically inactive (44%). Among the different income groups, a majority of the people earns less than R 4.000 per month, which is around € 290,-4. A detailed view at the financial position will be elaborated in the next section, where these will be related to low-cost insurance products. The income inequality, the existence of a dual economy, the social problems and the low life expectancy of the people in the country, make South Africa a country with a developing character. The graphs in Figure 2.2 give an overview of these main demographics characteristics in South Africa.

2

CIA World Fact Book 2007

3

CIA World Fact Book 2007 & AMPS 2006RA

4_{Exchange rate October 25th, 2008} 79% 9%

3% 9%

Population South Africa

Black Coloured Indian/Asian White 43% 13% 44% Labour market (15-65) Employed Unemployed (searching)

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Figure 2.2 Main demographics characteristics in South Africa (source: AMPS 2007, CIA World Fact Book 2007)

2.2.1.2 Financially served

In 2007 more than 19 million people of the total adult population, did not have a bank account. Even though more people have a bank account (‘banked’) compared to the years before, the majority of the South African population is unable or not willing to get access to financial products. The different groups of people that do, or do not hold any financial products, can be divided into four segments5:

 Formal banked: People who currently use at least one of the ‘formal’ products supplied by institutions governed by a legal precedent of any type.

 Formal other: Financial products not supplied by a financial institution.

 Informal: Products that operate without legal governance that would be recognised.  Unbanked: People neither having formal nor informal products.

Figure 2.3 shows some details on the banking status of the adult population, and makes a distinction between the different racial groups.

Figure 2.3 Banking status and racial groups (source: FinScope™ South Africa 2007)

The picture shows that a large group of people (25%) is still not using a bank account at all. Nevertheless, a continuous increase can be seen from 2005 (47%) to 2007 (60%) in people having a bank account.

5_{Finscope™ South Africa 2007}

8% 18% 17% 19% 10% 12% 9% 7%

Monthly income (age 16-50+) 2007

< R 699 R 700-1099 R 1.100-1.999 R 2.000-3.999 R 4.000-5.999 R 6.000-9.999 R 10.000-15.999 R 16.000+ 60% 4% 11% 25%

Financial banking products

Formal Bank Formal - other Informal Unbanked 0 20 40 60 80 100 Black White Asian Coloured 56% 95% 75% 54%

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Even though more people are banked nowadays, the use of financial products is still moderate. The major reasons for this group of people being unbanked are: they do not have a job, they are not able to afford financial products, and they do not have a regular income. While the general

consensus is that the absence of a financial product does not have to be a severe risk, still the

amount of cash people are being paid in and the daily risks in travelling with public transport, make it worthwhile to think about a bank account, travel insurance, and accident cover. Other relevant risks are damage to property, crops and drought, and legal restrictions, often due to the lack of financial literacy.

The stated reasons for being unbanked and the limited knowledge of available financial products show that financial services are still not an everyday used product. Nevertheless, there is interest in these products. Within the poorer, black community, not only the use of public transport is higher, but also funerals have a far more important position compared to other racial groups. One could say that this type of insurance is making use of people’s misery; nevertheless it does give them the possibility to have a decent and dignified funeral.

2.2.2 The low-cost insurance industry

Successfully serving the insurance market with products for the lowest income categories was thought to be almost impossible by many. The fact that the distribution channels used by brokers and intermediaries were particularly focused on the higher income categories, made it too expensive to sell this type of insurance products. Also the general idea that insurance companies could not make a profit from the lower-income markets, because of its low margins, made this market unpopular. With the general use and acceptance of cell phones which made direct contact with the customer possible, and the creation of specialised products, the low-income market was opened for those that were ready to serve this market.

2.2.2.1 The current market

The South African insurance market can be roughly divided into two categories: the life and non-life insurance market. The first category particularly focuses on mortality protection and retirement savings plans6, by providing an income for relatives when a family member dies. It contains products like funeral or burial insurance, annuities (e.g. pension) and other financial compensations. The second category focuses on the accident and health sector and the property and casualty sector by compensating people in situations of burglary, water or fire damage, for travel insurance and for people that need medical aid.

The increasing regulation in the industry starting in the beginning of this century, made insurance companies struggle with their environment. Increasing regulation force them to critically view their current way of doing business and to improve the value provided to their customers. The Financial Intermediary and Advisory Services (FIAS) ACT which was issued in 2002, was one of the regulations that has the purpose to provide consumer protection and enhance integrity of financial service industry. Further on, the annual report of the Ombudsman in 2005 points out that the policyholders should have a central position, instead of the shareholders, officials or intermediaries. Nevertheless, in 2006 the total amount of complaints about the insurance industry rose with 25% compared to 20057. It forced insurance companies to think about their current way of doing business and opened up the possibility to find new ways of revenue sources.

6

Datamonitor – October 2007

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In an overall market where a large proportion of the people has no type of insurance (76%, AMPS 2006 RA), the insurance industry needs to search for new opportunities to open up un-served

markets and develop customised products for those markets. The fact that the low-cost market can be seen as one in which products need to be offered, instead of demanded for (push instead of pull), makes it vital to change business models and find new ways for easy-to-use and cheap product solutions. Only then can the low-cost market be accessed and served with products that are profitable for both customer and company.

2.2.2.2 The players

As the previous section shows, the South African insurance market experienced a variety of changes in the last decade. The continuous search for new possibilities to improve and redesign the business creates trends among the insurance players. One of these trends is the ongoing access to the low-cost insurance market.

The amount of operating players in the South African insurance market is high, compared to other countries with a similar Gross Domestic Product (GDP). An overview of these countries, with their size of the insurance market (premium volume), can be found in Figure 2.4. Because of cross-border comparison and the (virtually) non-tradable aspect of insurance products, the purchase power parity (PPP) has been used as a standard8.

Total GDP (PPP, $ billion) Insurance premium volume (2005, $ billion) # Population November, 2008 (million) Share of world market (%) Australia 730.590 50.2 21.0 1.46 Turkey 722.581 5.7 71.9 0.17 Argentina 691.054 4.6 40.4 0.13 South Africa 663.950 34.7 48.8 1.01 Iran 647.592 2.4 65.9 0.07 Thailand 645.228 6.4 65.5 0.19 Netherlands 635.633 59.6 16.6 1.73 Poland 631.833 9.4 38.5 0.27

Figure 2.4 Overview of countries, insurance premium volumes & population (source: IMF, Swiss Re, CIA World Fact Book)

Figure 2.4 shows that based on the GDP, the insurance market in South Africa can be compared with the larger Western economies. This makes further comparisons in the research easier when it comes to insurance companies or economies overseas.

Next to the international comparison, the domestic market inhabits a variety of large players. These players can be categorised in offering short-term and long-term insurance products. Due to the specific scope and characteristics of the market for direct low-cost insurance products, only the short-term market will be focused on. Even though the short-term and low-cost insurance markets are not identical, the main players and the size of their gross premiums can be regarded as an introduction for the low-cost insurance market. The main eight players with gross premiums over R 1.5 million in 2006 are listed in Figure 2.5.

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Figure 2.5 Short-term insurers in 2006 (source: KPMG South African Insurance Industry Survey 2007)

Despite the fact that, based on their gross premiums, these are the eight main players operating in the South African market, the low-cost market has different players. The newness of this market makes it relatively unexplored by many surveys or other researches. Figure 2.6 in the next section should therefore be seen as a rough, first overview of the main players that are currently dealing with the concept of direct low-cost insurance.

2.2.3 Main players low-cost insurance

The current low-cost insurance market inhabits multiple players that are offering a similar product. The South African market is a relative mature market compared to other developing countries, with respect to the amount of large players. An overview of the main players with their type of low-cost insurance products will be given in Figure 2.6, after which a more detailed view can be given in the rest of the research.

Figure 2.6 Low-cost insurance players (source: Indutech internal documents)

0 2 4 6 8 10 12 10,23 7,19 4,35 3,43 2,22 1,89 _1,82 1,52

Short-term insurance market

(gross premiums over R 1.5 million in 2006)

Year of start

Operating brand marks

Initiatives/Products Price range - premium Hollard Insurance 2003/2004 Clientele Life Pep Stores  Accidental Life R20 Old Mutual 2007 Mutual & Federal

Shoprite Pick ‘n Pay GoBanking  Accidental Cover  Funeral Cover R10

Sanlam 2004 Santam  Family Funeral

 Family Personal Accident

 Cell phone Insurance  Santam Multihome

R15 – R240 per month

Metropolitan 2006 Cover2Go  Accidental Death Cover  Family Burial Cover  Essential Accidental

Death Cover

R10 – R20 per month

Liberty Life 2005 Liberty Life  Lifestyle Protector  Life Cover Plan  Accident Plan  Funeral Plans

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2.3 Mobile commerce technology in general insurance

With the elaboration on both product characteristics and market characteristics of direct low-cost insurance products, the technology for the use will be taken into account. Before the available and emerging m-commerce technologies will be discussed in Chapter 3, this section will briefly describe the current status of m-commerce technology in the general insurance market. This will be done based on several product concepts that can be found in the insurance market all over the world, and particularly in South Africa. The case study will also be used as input.

2.3.1 Direct insurance sale

For the direct sale of insurance products, SMS is a technology which is being used regularly. It supports the sale of products and enables digital payments. An example is the instant accident cover sold in South Africa by Cover2Go. By sending the name and birthday to a specific number, the person will receive a policy number by SMS, and is covered for one month for fatal accidents. Other

examples of SMS usage are ringtones, games and wallpapers that can be received on every cell phone, and where the payment is deducted from a person’s phone balance. The popularity and adoption of this type of entertainment services is still increasing worldwide.

Even though SMS provides an important and interesting starting point, most insurance products are more complicated and cannot be bought that easily with a cell phone. Even though SMS does provide the possibility to support easy interaction between a customer and a company, many other ways exist in which m-commerce can play an important part in the supply of information, sale and distribution of insurance products.

An example is a Swiss insurance company, which created a ‘mobile premium calculator’

(Reichhold, 2003), which allows customers to determine individual rates for various products and to make a comparison between the offers, all accessible with a cell phone. The offer is sent directly and can be evaluated by the customer. If the customer is interested, a call centre will contact and capture the rest of the personal details after which a final mailing of the contract will take place.

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2.3.2 Indirect insurance sale

Next to the direct sale of insurance products, the more traditional way is to use an intermediary. When it comes to easily selling insurance, many examples of this indirect insurance sale exist. However, when it comes to available options and innovativeness, one is more interesting to describe than the other. South Africa provides in this way two interesting options where insurance is being sold with the use of a third party.

The first one is the Spaza shops, where insurance products are sold with the use of a special device, which is based on GPRS and five different SIM-modules. Spaza shops are township based, sell everyday household products, and can act as an intermediary for prepaid based products like airtime and electricity as used in South Africa. A customer can buy an off-the-shelf insurance product (e.g. accidental death insurance), after which the GPRS device is able to capture the personal information needed to complete the sale. Next, the customer is registered, covered, and can be updated

personally or on his cell phone, when the next premium needs to be paid. In this way an improved relationship between customer and company is established. For the insurance company it is easier to reach the target group, to increase the certainty of payments, and because it is sold by a known person, it also increases the trust in the product. Cover2Go is the supporting party behind this concept.

The second option is another product concept of Cover2Go. This is a comparable off-the-shelve product, which contains several possible insurance products, from life insurance to accidental death cover. After the customer has decided to buy a product, and has paid at the till for the box, the first premium plus the necessary personal information is captured at a special counter called the Money Market. The customer is instantly covered and is contacted when the next premium needs to be paid. For the same reasons as with the Spaza shops, a customer and insurance company benefit from this concept.

2.4 Overview direct low-cost insurance

After having described the various aspects of direct low-cost insurance, an answer to sub question 1 can be given:

“What is direct low-cost insurance?”

Compared to the regular way of selling insurance, direct low-cost insurance is a new way of selling relatively cheap insurance products to the lower income categories, without the use of a broker or any other type of intermediary. Most offered products are related to accident cover, funeral cover and life cover. Both the technology and the way of doing business are rather different, compared to traditional ways of selling insurance. To serve a complex market like the South African one, in which many people are rather inexperienced with financial products and the market is rather unique, insurance companies need to customise their products to the market and focus on the long term to make it profitable.

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3. Mobile commerce technologies

For the use of direct low-cost insurance products, mobile commerce technologies are required. Technologies can vary from simple devices, to advanced wireless networks with multiple features of security. To identify these technologies and determine their value for a final decision support framework, this chapter will describe those technologies that are relevant. This is done independent of the low-cost insurance products for which they in the end will be used. This is necessary to get a thorough view on the possibilities on the global market of m-commerce technologies.

To determine the applicable m-commerce technologies, this chapter has been divided into five sections: the origin of mobile commerce (§ 3.1); general mobile commerce applications (§ 3.2); the mobile commerce framework (§ 3.3); a technology landscape (§ 3.4); and a technology roadmap (§ 3.5). Because this chapter will result in a technology landscape and a technology roadmap, sub question 2 can be answered: What are the applicable m-commerce technologies for the direct low-cost insurance market?

3.1 From electronic to mobile commerce

Before the m-commerce technologies will be researched and described, first of all the position of m-commerce in relation to other comparable study fields needs to be scoped. Particularly the field of e-commerce shows similarities with m-commerce, which can be useful for researching relevant technologies in m-commerce. Therefore a framework developed by Tiwari & Buse (2007) will be used, in which a distinction is made between Mobile Business and Mobile Commerce, and Electronic Commerce. A presentation of the author’s figure can be found in Figure 3.1.

Figure 3.1 The mobile commerce perspective (Tiwari, Buse; 2007)

The elements in the figure are summarised in the following way (Tiware, Buse; 2007):

 Electronic Business: E-business is the integration of systems, processes, organisations, value chains, and entire markets using internet-based and related technologies and concepts.

 Electronic Commerce: E-commerce is the basic purchase and sale of products and services over the web.

 Mobile Business: M-business involves business-related communication among individuals and companies where financial transactions do not necessarily occur.

 Mobile Commerce: M-commerce is any transaction, involving the transfer of ownership or rights to use goods and services, which is initiated and/or completed by using mobile access to computer-mediated networks with the help of an electronic device.

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3.2 General mobile commerce applications

Where cell phones, smart phones and Personal Digital Assistants (PDA’s) were considered to be a luxury for many, nowadays these devices are for more accessible by a wide variety of people. With the high rate of new, upcoming technologies that can be used in these mobile devices, also a jungle of devices, applications and technological terms is created.

To get an idea of the current status in the world of m-commerce, an overview of the most popular activities will be highlighted. A few examples of applicable industries will be listed, among which the insurance industry is one. The information on m-commerce applications described by Ngai & Gunasekaran (2007) and Varshney & Vetter (2002) will be used to elaborate on the different areas of m-commerce applications in Figure 3.2.

Application Details Examples Example

industry

Mobile financial applications

Applications where mobile devices become a powerful

financial medium

Banking, brokerage, and payments for mobile users Retail Insurance Banking Brokers Mobile advertising Applications turning the wireless infrastructure and devices into a powerful marketing medium

User specific and location sensitive advertisements Radio & TV Advertising Construction Mobile entertainment Applications providing entertainment services to users on per event or subscription basis

Mobile/interactive gaming, music and video on-demand, location-based entertainment Music Telecom Product locating and searching Applications helping to find the location of product and services that are needed

Finding the location of a new/used car of certain model, colour and features

Car-industry Market places Location based services Applications offered based on the user’s location, by the use of positioning techniques

Navigation, emergency caller location, geographically sensitive billing and location-based information

Emergency services

Wireless reengineering

Applications that focus on improving the quality of business services using mobile devices and wireless infrastructure

Instant claim-payments by insurance companies Banking Retail Transport Insurance M-commerce in companies, industries or countries A variety of activities focusing on the management, improvement and control of the working environment

Mobile inventory management, mobile office, location tracking of goods, boxes, troops, and people;

transmission of information related to aging components to vendors; detailed information on one or more products that can be downloaded by vendors

Production-based Car-industry Government

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3.3 Mobile commerce framework

To classify the different aspects and elements of m-commerce technology, a framework will be used. This framework is developed by Varshney & Vetter (2002) and gives a clear representation of the difference between the different layers of attention regarding m-commerce, and makes a distinction between the user plane, and the developer and provider plane. The framework has been used in several studies, in which in most cases a rather global overview is being kept.

Figure 3.3 The m-commerce framework (Varshney, Vetter; 2002)

Based on the definition of m-commerce stated earlier regarding the interaction with the user, the ‘user plane’ part of the framework will be focused on. This focus will incorporate the elements that are most related to the technology side of m-commerce, and will leave aside the less related elements of the developer and provider plane. A brief discussion on the different elements will be given below, after which in section 3.4 and 3.5 the discussed elements will be elaborated in more detail in a technology landscape and a technology roadmap.

 Mobile commerce applications. The collection of activities that can be

performed, using a mobile electronic device. Figure 3.2 presents a collection of the identified categories.

 Wireless user infrastructure. Includes the mobile (handheld) devices that are the entry point for most mobile commerce applications.

 Mobile middleware. Enabling layer of software to connect e-commerce applications with different mobile networks and operating systems without introduction mobility awareness in the applications.

 Wireless network infrastructure. The networking support of mobile commerce applications, in which coverage and bandwidth are the two most important factors.

The current and emerging m-commerce technologies will be classified in the above defined categories. The classification of these m-commerce technologies also determines the scope of the different types of technology that are required for the use of direct low-cost insurance products. Because these products only serve a particular part of the overall market, the possibility of

identifying technologies that are not relevant exists. Nevertheless, this situation is preferred rather than missing available opportunities.

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3.4 Technology landscape

The difficulty in describing the current status of m-commerce technologies from a global perspective, finds its origin in the variety and diversity of ways in which technology can be used in products and services. However, to identify technology characteristics, the technologies itself need to be described. The technology landscape in this section will identify technologies that can be used in and for products and services in the m-commerce area. It will give the basis for a decision support framework and tries to give structure to the multiplicity and diversity of m-commerce technologies. The technology landscape is based on both literature and practical resources, and will be used to identify relevant technology elements. The technology landscape is divided into four sections: mobile commerce applications (§ 3.4.1), wireless user infrastructure (§ 3.4.2), mobile middleware (§ 3.4.3) and wireless network infrastructure (§ 3.4.4).

3.4.1 The mobile commerce applications

Because both m-commerce technologies and industries are continuously evolving, also new product concepts are being developed. Each product concept uses technology in its own particular way, based on the functionality of the technology and the needs of the customer. Based on the first layer of the commerce framework presented in Figure 3.3, a broad range of available

m-commerce applications and related technologies will be described.

3.4.1.1 GSM based applications

The technology that can be regarded as the most common technology for m-commerce products is GSM. Not one m-commerce technology used to communicate and facilitate customers can be found in so many different industries. SMS is an important part of the GSM technology used in various concepts, of which a few will be highlighted.

For mobile ticketing concepts, SMS provides the platform to receive 2D barcodes, that enables a customer to purchase unique tickets, and which enables fast and easy access to concerts or other events. Examples of this mobile barcode ticketing system can be found in several pop concerts and in rugby matches in the United States9. Another example is a field study that was performed in the Netherlands to the electronic ticketing in public transport (Dekkers & Rietveld, 2007). Customers were offered the possibility to receive tickets on their cell phone. Also similar initiatives have been deployed in Scandinavia and in Japan by the mobile operator NTT DoCoMo, since the late 1990s.

Another often used application of SMS is the access to information based services. These services can vary from public stock and news information, to detailed personal information concerning a reservation or requesting access codes for online banking services.

When it comes to other technologies or services in the GSM-standard, of which MMS, WAP and GPRS are the most accepted ones, other product concepts can be found.

MMS offers possibilities for companies and customers to interact via the use of video and audio. An example is a television company, which wanted to create a two-way dialogue and a real

conversation with the viewer with the use of MMS. People could send pictures and sounds to television programs instantly or were able to cast their votes on the most valuable players in a baseball-match (Davis & Yung, 2005). This interactive system was also used at Sony Playstation and 20th Century Fox as a marketing campaign to build an effective process of interactivity with the consumer.

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Next to MMS, also WAP and GPRS can be found in m-commerce applications. Already in 2000 WAP based applications increased in popularity, among which Amazon.com is one of them (Denvir, 2000). In cooperation with Nokia, they created an m-commerce market, called ‘Amazon.com Anywhere’, which responded to the increasing amount of wireless devices people carry with them. The online shop offered the same products as the normal web based shop.

With respect to the applications described above, GPRS can be seen as an enabling technology, a carrier for these applications, and will be further discussed in section 3.4.4.

3.4.1.2 Financial applications

The financial world traditionally has a pioneering role when it comes to ICT. This is not only caused because of high safety and security standards in the industry, but also through the urge of continuously distinguishing itself from other players in a comparable and high-competitive market. Therefore, financial players are also looking at mobile commerce applications to capture upcoming opportunities.

Based on e-banking initiatives in the late 20th century, the next step was to bring banking activities to the mobile platform, based on WAP and GPRS. In this way, access to personal bank accounts, transfer money between accounts and pay bills with a mobile device, from anywhere and at any time was made possible. These mobile devices can also be of importance when it comes to identifying the payer and confirming a transaction. Also concepts in which a mobile wallet or mobile payments can be done, are slowly being introduced to the public. Section 3.4.1.5will give a more detailed view on the concept of mobile payments and wallets.

Mobile banking (m-banking) initiatives can be found all over the world, but the more developed countries show the best solutions when it comes to completeness, security, authentication and encryption. Nevertheless, a rising popularity for m-banking applications lies within countries where most people are unbanked. Upcoming economies like the ones in Africa and South America show a great rise in m-banking applications. Particularly when it comes to the amount of people that are ‘unbanked’ and need to visit their bank with every transfer, mobile banking can offer decisive advantages (Jones, 2008). But also in countries in Eastern Europe like Estonia is electronic banking adapting to mobile technology and is the popularity among users rising (Eriksson et al., 2008).

When it comes to interaction between customer and company, other financial applications have found their way into society nowadays. Next to m-banking discussed above, also activities like brokerage services and online stock trading have changed and tried to adapt to the new

m-commerce environment. For brokerage services, this entailed that online marketplaces were set up to support customers and suppliers to meet and mediate between them, which in its way eliminated brokers to be part of the process. With concern to online stock trading, possibilities to connect the online world with the mobile world enables people to perform stock trading activities instantly, contact their trading agent when necessary, exchange funds, transfer money, monitor investment opportunities, receive updates of interest rates on mortgage, etc. A pilot test of wireless stock trading was launched in 2002 in Hong Kong, through which users could perform these activities. Based on positive results, similar activities were initiated.

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3.4.1.3 Mobile entertainment services

In the beginning period of cell phones, the majority of mobile entertainment existed out of ringtones, games and basic WAP pages. With the introduction of 3G technology, more advanced content can be received by a majority of people. Nevertheless, many mobile entertainment activities still focus on the area of basic 2G enabled technologies. A few upcoming and popular activities are instant messaging, location based entertainment services, mobile internet, instant video and audio downloads, mobile TV and mobile gambling. This list is of course continuously expanding (Wong et al, 2005). For the future it is expected that particularly user generated content will become more

popular on cell phones, as it is on the web nowadays. The uploading of photos and videos, chatting with a community of friends, the creation of social networks, listening to music and watching television, is expected to generate the most revenue for mobile service providers in 2011 (Lush, 2007).

An example of product concepts that incorporate mobile entertainment services is Mobile TV of KPN in the Netherlands, which was introduced in the end of 2007 for a limited selection of cell phones. Other mobile TV content providers are Fun Little Movies, ROKTV, Comedy Time Network and GoTV Networks. These providers offer various types of content, among which are rebroadcast television, comedy series, and live-action comedy films. In a next 4G environment with higher mobile bandwidth possibilities, expectations of buying and downloading a movie on a cell phone in a couple of seconds, can become reality.

When it comes to music, games, podcasts and applications, Apple also provides a large amount of products with their iTunes store. But also new companies like RawRip.com, who will start in November 2008, have found a way to offer online music streaming and downloading, in which royalties are transferred to the right person. Also in upcoming countries like India, the mobile entertainment industry is expected to grow to $2.2 billion in 2013 due to the availability of third generation mobile technologies.

3.4.1.4 Enterprise purposes

Even though m-commerce may not be directly related with activities like controlling internal business processes and inventory management, it can however provide an added value in nowadays organisations. As the definition states (Tiwari, Buse; 2007), ‘the transfer of ownership or rights to use goods and services’ can be supported by m-commerce with various concepts and technologies.

Controlling the overview and access to a company’s electronic mail and personal information, can be done with specialised software packages. This software is implemented enterprise wide and pushes requested information to an employee’s wireless handheld device. Numerous examples are OneBridge Mobile Solutions Platform, iAnywhere Solutions and Intellisync Mobile Suite (Heck, 2004).

Next to e-mail and access to personal information, also order placement, inventory status and sale records can be accessed with the use of handheld devices. In a mobile inventory system, the manufacturer’s representative checks the inventory level at a client by scanning the bar code of a product, and digitally updates this information in the manufacturer’s ERP system. RFID can be a decisive factor in mobile inventory management, in which so called ‘tags’ show whether inventory is at the required level or if action needs to be taken (Hoang et al, 2008).

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3.4.1.5 Mobile payments

For most mobile commerce applications, the facilitation and control of payments is an important aspect of the overall product concept. This requires creativity in the approach and insight in the possibilities of mobile payments. In this respect, three main problems will be focused on.

The first problem is the layout of the mobile payment (m-payment) concept itself. This is influenced on one hand by the technology and on the other hand by the stakeholders involved. While the technology itself can differ between the various concepts, the stakeholders can be roughly divided into eight groups. Figure 3.4 gives an overview of these stakeholders.

Figure 3.4 Major mobile payment players (Karnouskos et al., 2004)

Even though many parties are involved, which can make communication between various systems sometimes complicated, it has evolved to a mature concept, which is being used all over the world. Mobile payment solutions vary from simple wireless payment cards to the creation of virtual wallets (Smith, 2008) that have full online accessibility and security. A concept called ‘SMS betalen’ (SMS payments) from a bank in the Netherlands is the execution of such a mobile wallet, in which all customers can send money to any other phone, based on SMS. Other players around the world active in this field are Globe Telecom in the Philippines, Fundamo in South Africa, Celpay in Zambia and Safaricom in Kenya. The latter one created a successful concept ‘M-PESA’, in which over 200 billion euro’s per month is being transferred between ‘unbanked’ people10. Also possibilities to combine mobile payments with ATM’s and add NFC technology to credit cards in order to extend the functionalities are examples (Fest, 2008). Both SMS and NFC are accepted and integrated with existing products by several companies like PayPal, Philips, IBM, Fujitsu, and the big credit card companies like MasterCard and Visa (Au, Kauffman; 2007).

The second problem discussed, is the trust in and security of mobile payments. From a user perspective, these features are of great importance. And if properly controlled, these features can give an important boost to m-commerce. The trust people have in an entity like a bank or in a software party, is not the same. Customers expect the same secure banking practices they are used to with a regular bank. This also relates to the security in mobile payments, which is based on the identification and authentication of a customer, and the encryption level of transactions. With the concern of these problems and the belief that mobile payments would become one of the most successful mobile services, the idea to create a national public-key infrastructure was born (Hassinen et al., 2008). The key is controlled by the government organisations, and is an example of how mobile payments are being secured.

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The last problem regarding mobile payments, are the payment devices or terminals. Next to cell phones and PDA’s, also more commercialised devices are part of the mobile payment concept. For example in the retail sector, devices are used that communicate with RFID or have multiple SIM-cards for a real-time GPRS connection to sell and register products. Also ATM’s are being extended to operate as self-service vending machines and even cell phones are being integrated with credit card functionalities to operate with non-contact readers in shops (Salz, 2008).

3.4.2 Wireless user infrastructure

Each of the different mobile commerce applications described in section 3.4.1, incorporates different technologies and devices. These devices vary in size, shape, functionalities, easiness to use, etcetera. The second layer of the m-commerce framework focuses on the wireless user

infrastructure, devices that are the entry point for the mobile commerce applications, and will give structure to this focus.

The devices that will be described can be divided into two groups: the communication devices and the mobile computers. With respect to the framework, the user interaction with the product will be paid particular attention to. The focus of this section is to identify the different components of devices used within m-commerce applications, and to understand the characteristics and usability of them.

3.4.2.1 Communication devices

Communication devices can be seen as any device that assists in the transmission of data to communicate. Cell phones, cordless phones, smart phones and advanced cell phones are examples of such devices. Next to calls and text messages, they can offer various functionalities like internet capabilities, e-mail and a full keyboard. Most of them rely on technologies like GSM, GPRS, WAP, UMTS, and Bluetooth. Without going into detail, a communication device includes six major components: a mobile operating system, a mobile processor unit, a micro browser, input/output devices, a memory and a battery (Hu et al., 2005). For the final execution of a successful m-commerce application, the device is depending on the whole range of technologies and available functionalities to operate successfully.

3.4.2.2 Mobile computers

Next to communication devices, the second group of devices are the mobile computers. This is a collection term for devices like PDA’s, Notebooks and Pocket PC’s. Compared with the

communication devices, these are often more advanced devices, and show a stronger similarity with the functionalities of a personal computer at home. The difference can always be found in the power source and the mobile functionalities.